February 07, 2007

Razors and Blades Again and Again: Apple and Kodak

The last two days have been
interesting for those of us with a strong interest in razors and blades, in
this case, Apple’s iPod and music and newly-announced printers by Kodak and the
cartridges that will go in them. Yesterday, Steve Jobs posted Thoughts on Music on
the Apple website, in which he set out his views of music DRM. Apple is
prepared to walk away from DRM (well, only sort of, and nothing suggests that
Steve Jobs is willing to do so more generally (read: Don’t expect Pixar films
to be free of DRM anytime soon)). And Kodak
has announced a new approach to selling printers and cartridges: “think: is it smarter to save money on a
printer or ink? (Hint: You only buy the printer once.)” Raise prices on
printers and lower prices on cartridges. Both of these are worth considering
more carefully.

While the empty iPod is a thing
of beauty, you probably want to listen to something on it. Razors and blades.
Apple sells the razor, and content for the iPod comes from many sources. Jobs
does a little division—number of iTunes songs sold/number of iPods sold—to note
that Apple has sold 22 songs per iPod. More math and Jobs concludes that the
average full iPod gets 97% of its content elsewhere, from unencrypted CDs, from
legitimately downloadable content—I listen to BBC and MarketPlace podcasts—and
presumably from p2p sites with copyright-infringing content.

But, as I have noted in a prior
post last October, Apple makes a fortune off of the iPod. Apple has routinely
pushed for lower prices for content on iTunes to drive iPod sales. Sell razors
and give away the blades. The iPod is—first and foremost—a copying device. If
DRM interferes with copying, get rid of it. The lowest possible price for music
is zero. Plus, says Jobs, the music industry is playing Apple: they sell all of
their CDs copy-control free, so why on earth should Apple get stuck selling
copy-controlled content? As Jobs puts it: “[s]o if the music companies are
selling over 90 percent of their music DRM-free, what benefits do they get from
selling the remaining small percentage of their music encumbered with a DRM
system?”

That isn’t really right. Guys who
sell copiers rarely are interested in things that make it hard to make copies.
Jobs must recognize that the music industry is in the midst of a format
transition. Music has done that before: moving from wax cylinders to LPs to CDs
and now online. The music industry wants this transition to include encryption.
They are stuck selling unencrypted CDs—SonyBMG’s effort to do otherwise was a
smashing failure—because of the installed base of CD players, but they don’t
face these backwards compatibility restrictions for online music, hence the
difference in approach on encryption. I am sure that Steve Jobs gets that, but
you certainly don’t see that in his post.

The second thing we are seeing is
that DRM has also operated as a way to look the iPod as a platform. The Jobs
letter pitches this as proprietary format competition—Apple’s version competing
with Microsoft’s Zune and Sony’s own format—and that is fine, but the letter
ignores the fact that Apple has taken affirmative steps to block others from
selling DRMed content for the iPod. When RealNetworks reverse-engineered the
iPod to make it compatible with Real’s online store, Apple updated the iPod to
block the sales. But Apple is losing on this
front with European regulators, and so Apple may see this as unsustainable.
Indeed, Jobs ends his letter with a plea to the Europeans to go chase the European
music companies—instead of Apple presumably—and then Apple will
“wholeheartedly” embrace a DRM-free music marketplace.

Jobs should start with what he
can control. That means not blocking the next reverse engineering of the iPod.
And then we should turn to Pixar. Do the same rules apply to video? Jobs will
almost certainly note that video has had encryption from the getgo. Want to
finally be done with the VCR but keep the content on a few stray tapes? My
DVD-recorder blocks me from doing that. And DVDs have long included a variety
of restrictions on use, country restrictions being the most obvious (you can’t
play region 2 DVDs on a region 1 player). I doubt that Pixar will abandon DRM
anytime soon. The difference, of course, is that Jobs doesn’t have a razor for
video—the video iPod notwithstanding—so he won’t sacrifice content sales to
grow the video player platform.

As to Kodak, briefly, printers
have usually been sold at low prices, with the money being made on the
cartridges. The rise of cartridge refilling
has put pressure on that business model, and printer sellers have responded
with contracts and lock-and-key systems to try to tie cartridges to printers.
All of that is actually quite interesting and raises tricky issues under the
Digital Millennium Copyright Act—I have a paper on
this—but we should want a legal system that supports competition among different
systems. Kodak’s new offering represents exactly that competition.

Comments

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It seems like there is a profound symbiotic relationship here whether or not they choose to admit it or not. Neither side has much to gain from regulating their respective realm. If Apple sells more iPods when the music is cheaper, or more music is sold when more iPods are in the hands of consumers, you would think they could come to some agreement that would establish an equilibrium when it comes to profits.

Obviously, right now, Apple is benefitting more from the chaos in the music industry regarding copyright protections. But, we need to consider (Apple needs to also) the fact that without this music the iPod would be a useless piece of plastic (even though it is a particularly aesthetically pleasing piece of plastic).

I'll allude to an analogy to help illustrate my point. The Oxpecker is a bird that eats the ticks and parasites off of the Rhino, while at the same time feeding off of the wounds of the Rhino if there are any. It is a classical mutualistic symbiotic relationship.

For Jobs to come in and wag a finger at the music industry is like the Oxpecker scolding the Rhinoceros for not bleeding MORE when the Rhinoceros is wounded. The Oxpecker might get fat off of the blood at first, but in the long run, the Oxpecker is going to be without a host if the Rhino continues to bleed. If the music industry continues to bleed, this may be to the detriment of both parties.

Therefore, why not cut the music industry in on some of the profits from the iPods? It seems like right now, we are trying to put a bandage over the rhinoceros wound (DRM) and the Oxpecker is trying to peel it off (Jobs complaining about the DRM). How about the Oxpecker gets off his ass and gets the Rhino something to eat ($) since the Rhino is over here dying and the Oxpecker is fat and healthy at his expense. It might be to the benefit of both parties.

While I am not yet even a law student, I can't comment to what is exactly "legal" and what is not. I will say that it doesn't seem "fair" for Apple to act this way.